New Law Limits Franchisors’ Joint Employer Liability Exposure In Wisconsin

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In an environment where franchisors are increasingly concerned about being deemed “joint employers” with their franchisees, the Wisconsin Legislature has provided some welcome relief. It has enacted legislation that provides franchisors with assurances that they will not be treated as an “employer” of the employees of a franchisee for purposes of Wisconsin laws pertaining to unemployment insurance, worker’s compensation, employment discrimination, minimum wage and wage payments, merely because the franchisor retains rights of quality control under the parties’ franchise agreement.

2015 Wisconsin Act 203 adopts the definition of “franchisor” found in the Code of Federal Regulations. Such franchisors may still be treated as an employer of its franchisee’s employers in the following situations: (a) the franchisor has agreed in writing to assume that role; or (b) the franchisor has been found by the applicable department or division of state government to have exercised a degree of control over the franchisee or the franchisee’s employees that is not customarily exercised by a franchisor for the purposes of protecting the franchisor’s brand.

Recent rulings and policy initiatives of the National Labor Relations Board and U.S. Department of Labor have suggested that indirect rights to control another entity’s employees may be sufficient to support a finding that a joint employer relationship (i.e., that more than one entity is an employer of an individual employee) exists. But under the federal Lanham Act, franchisors must impose quality control standards in order to maintain the integrity and enforceability of their trademarks. These quality control standards may be considered to constitute such indirect control.

The dilemma faced by a franchisor in this environment: if the franchisor enforces quality control to protect the trademark and brand, it risks having joint employer liability imposed and being held liable for acts of its franchisees’ employees (for whom, in the vast majority of cases,  the franchisor has no legal or contractual right to control); if it does not, it weakens the strength of its marks. The Wisconsin bill provides assurance to franchisors offering franchises in the state of Wisconsin that enforcement of quality control standards will not result in an imposition of joint employer liability under Wisconsin law. 

When Does The Statute of Limitations Begin to Run on WFDL Claims?

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Although the Wisconsin Fair Dealership Law (“WFDL”) provides significant protections for franchisees and dealers against termination and non-renewal, the statute of limitations for filing WFDL claims is one year. That short limitations period can be a minefield for parties seeking relief under the WFDL.

For 30 years, the Wisconsin Supreme Court’s ruling in Les Moise, Inc., v. Rossignol Ski Co. has provided the principal precedent in evaluating when WFDL claims accrue for purposes of the one-year statute of limitations.  In Les Moise, the court held that a Chapter 135 claim accrued on the date that the dealer receives notice of an allegedly improper termination, instead of the actual date of termination.

A recent unreported decision of the Wisconsin Court of Appeals, Chili Implement Company v. CNH America, LLC, illustrates unresolved issues that remain in applying the Les Moise holding.  The CNH court held that “we disagree with CNH that Les Moise establishes that all causes of action under the Wisconsin Fair Dealership Law accrue when a dealer receives a termination notice.”

The facts of CNH:

  • CNH sent a notice to Chili Implement on March 1, 2010, stating that Chili Implement is in default of the parties’ agreement because it has failed to achieve a satisfactory market share and to stock sufficient inventory.  The notice also stated that to avoid termination, Chili needed to accomplish two things within one year of the notice date:  “to meet or exceed 90% of the Wisconsin state market share” and to stock sufficient inventory to achieve that market share.
  • After a year passed, CNH determined that Chili Implement has failed to meet the stated requirements and terminated Chili effective May 31, 2011
  • Chili sued CNH on January 19, 2012, alleging violations of the WFDL, among other violations.

CNH alleged that under Les Moise, CNH’s claims under the WFDL were barred by the one-year statute of limitations.  The notice was sent March 1, 2010; the lawsuit was filed almost two years later, on January 19, 2012.  Chili Implement asserted that its WFDL claim accrued as of the date of actual termination, on May 31, 2011.  The trial court had granted summary judgment in favor of Chili Implement on the statute of limitations question, finding that a material factual dispute existed as to whether the 2010 notice was actually a notice of termination.

The CNH court did not answer how a lawsuit such as Chili Implement’s should be treated.  The CNH court cited limiting language from Les Moise that what matters is whether, upon receipt of a notice, the dealer was “immediately capable of determining” all of its claims.  The court noted that Chili Implement had two potential claims:  one based on inadequate notice (which was capable of immediate enforcement upon receipt of the 2010 notice) and termination without good cause (which depended on subsequent acts or omissions of CNH).  But because CNH had not briefed how such claims should be handled, the CNH court declined to do so, and found that CNH has failed to show that it had a winning statute of limitations argument based on Les Moise.

So the issue remains:  when does the WFDL statute of limitations begin to accrue?

[Chili Implement Company v. CNH New Holland, LLC, 2014AP1496]

Crowdfunding Comes To The Franchise World

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We’ve been curious to see whether crowdfunding would find the world of franchising.  Traditionally, the solicitation of investors through general advertising has been severely restricted under federal and state securities law; these limitations also apply to crowdfunding, or seeking capital contributions through online solicitation of the masses. The JOBS Act of 2012 sought to remove some of these restrictions, under the theory that both investors and businesses seeking capital could benefit from this new internet marketplace, as long as certain protections are in place.

Now Fund A Franchise, has begun to accept applications from prospective franchisees and invite investors to provide funding in a manner similar to that deployed by Kickstarter. It appears that Fund a Franchise is the first crowdfunding platform organized to cater to the franchising market.

Fund a Franchise requires that a prospective franchisee complete an application and be accepted into the program. The prospective franchisor must agree that it will consider a franchisee capitalized at least in part through the crowdfunding program.  The prospective franchisees pay a monthly fee to be listed on the site and have access to a “deal room”; investors may participate at no charge.  Investments may be made in the form of equity or debt.

Crowdfunding has the potential to match individuals who wish to open a franchised business, but lack the necessary capital investment to do so, with investors who might be willing to take a chance on a franchising opportunity.  But several questions and issues occur to us, including:

  • Will franchisors agree to participate?  Generally, franchisors generally want to limit the number of owners of a franchisee.  If the franchisee has too many owners, it may not be clear who has the right to make decisions on behalf of the franchisee.   Many franchisors may be reluctant to approve a franchisee that raised capital through contributions from numerous individuals.  A franchisor would be more likely to accept a franchisee that consists of one manager/entrepreneur providing primarily services to the start-up business and a single sophisticated investor whose principal contribution is capital.  The Fund a Franchise website suggests that several franchisors are willing to participate, but none are large systems.
  • Will a manager/entrepreneur and investor(s) who are brought together online be compatible?  Such arrangements generally succeed when there is a great deal of trust established among the parties; written contracts can only go so far.
  • At this time, only accredited investors (generally, individuals with over $1 million in assets or with income in excess of $200,000 in each of the last two years) can participate in crowdfunding on Fund a Franchise and similar platforms.   This places a significant constraint on the number of persons who are eligible to invest through the site.  The prohibition against participation by non-accredited investors will end when the SEC finalizes regulations permitting such investments, but these regulations are not likely to be in place before early 2016.
  • Using Fund a Franchise will not avoid legal fees; the site requires users to retain a securities lawyer (although the site will apparently provide referrals to such counsel upon request).

(Note:  This post is provided for information purposes only; we make no recommendation as to the advisability of utilizing Fund a Franchise or any other investment platform or investing in any business.  You should consult legal counsel and your financial advisor before entering any such arrangement)

The Good, the Bad, the Uncertain: Developments In Franchisor Liability

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          The legal debate over imposing vicarious liability of franchisors – or making franchisors liable for the acts of their franchisees and franchisees’ employees – has flared up this year, thanks in large part to a recent court decision and policy directives emanating from the Office of the General Counsel of the National Labor Relations Board.

          The franchise model assumes that franchisees merely license franchise trademarks, copyrights and other intellectual property from franchisors, and that the franchisee is not the agent of the franchisor.  While franchisors may insist that the franchisee follow quality control, marketing and product consistency standards that affect the franchisor’s trademarks, franchisors typically contractually disclaim any right to control day-to-day hiring, firing and supervision of employees.  But that does not prevent parties who assert claims against franchisees from also alleging that the franchisor should be liable as well, based on principles of agency.  The claimant alleges that the franchisee and its employees are agents of the franchisor, and thus the franchisor is liable as well.

          First, the good news for franchisors:  In late August, the California Supreme Court held that Domino’s Pizza LLC was not liable for the acts of a franchisee whose manager had allegedly harassed an employee.  The court’s decision was based largely on the terms of the franchise agreement between Domino’s and its franchisee.  The court did note, however, that a franchisor “will be liable if it has retained or assumed the right of general control over the relevant day-to-day operations at its franchised locations … and cannot escape liability in such case merely because it failed or declined to establish a policy with respect to that particular conduct.”

         Next, the bad news: in July, the Office of the General Counsel to the National Labor Relations Board announced that it would authorize complaints alleging that McDonald’s USA LLC is a “joint employer” of the employees of its franchisees.   The Office of the General Counsel found merit in charges that McDonald’s and its franchisees had violated the rights of employees “as a result of activities surrounding employee protests.”

          The NLRB release announcing the decision did not set forth the grounds as to why McDonald’s was deemed to be a joint employer, but the NLRB Office of the General Counsel has signaled, in another pending case, that it seeks to change the standard for determining when “joint employer” status is applicable.   Under the existing standard, which has been in place for 30 years, a finding of joint employer status is appropriate when two or more parties “share or codetermine those matters governing the essential terms and conditions of employment.” The International Franchise Association and other trade groups have filed a brief in the pending case, opposing the attempt by the NLRB Office of the General Counsel to re-define joint employer status so as to include situations where one party indirectly controls the other.

        While a revision to the definition of joint employer would affect many industries, it would have a massive impact on the franchise industry, whose business model is predicated in large part on the distinction between franchisor and franchisee.